Gains from Trade in the HO Model• Ricardian model: constant set of tradeoffs (costs)– One homogeneous input: labor• The HO model: (1) multiple inputs—labor capital, land,etc.—and (2) variations in the quality of inputs• PPC under the HO model– As produce more of one good, opportunity costsincreases

Trade and Income Distribution• The HO model:– Labor can be divided into categories of different skill levels– Other types of inputs can be included– Industries can require different mixes of various inputs

• Systematic relationship between the factorendowments of a country and the winners andlosers from trade

Labor earns wages proportionate to its skill levelOwners of capital earn profitsLandowners earn rentsThe amount of income earned per unit of input depends onboth the demand (derived demand) for inputs and thesupply of inputs

The Stolper-Samuelson Theorem• An increase in the price of a good raises the income earnedby factors that are used intensively in its production(exports)• A fall in the price of a good lowers the income of the factorsused intensively in its production (imports)

The Stolper-Samuelson Theorem• Not all factors in the export industries will be betteroff, and not all factors used in import competingindustries get hurt• Abundant factors will benefit, while scarce ones willbe hurt• Magnification Effect: the change in output priceshas a magnified effect on incomes.

The Stolper-Samuelson Theorem• Ultimately, the effects on income of an opening oftrade depends on the flexibility of the affected factors• More flexible the resources are to adjust, the less hurtthey are.

Specific Factors Model• The HO model assumes that factors are mobile• The Specific Factors model assumes:– (1) land and capital are immobile and cannot migrate(specific factors)– (2) labor is fully mobile and can migrate from one sectorto another (variable factor)

Extension of the HO Model:The Product Cycle• Evolution of manufactured goods and technology• Early Stage: Likely in industrial countries– High income consumers– Scientific and engineering inputs– Capital